Wheeler Real Estate Investment Trust's (WHLR) CEO Jon Wheeler on Q4 2016 Results - Earnings Call Transcript

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Wheeler Real Estate Investment Trust (NASDAQ:WHLR) Q4 2016 Earnings Conference Call February 28, 2017 10:00 AM ET

Executives

Laura Nguyen – Director of Capital Markets

Jon Wheeler – Chief Executive Officer

Wilkes Graham – Chief Financial Officer

David Kelly – Chief Investment Officer

Analysts

Lawrence Raiman – LDR Capital Management

Craig Kuccera – Wunderlich

Steve Shaw – Compass Point

Mitch Germain – JMP Securities

Lawrence Rehman – LDR Capital Management, LLC

Kent Engelke – Capitol Securities

John DeMaio – Newbridge Securities

Operator

Greetings, and welcome to Wheeler Real Estate Investment Trust 2016 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now pleasure to introduce your host Laura Nguyen, Director of Capital Markets. Thank you. You may begin.

Laura Nguyen

Good morning, everyone, and thank you for joining us. On the call today will be Jon Wheeler, Chairman and CEO, Wheeler Real Estate Investment Trust; and Wilkes Graham, Chief Financial Officer. Following Management’s discussion, there will be a question-and-answer session, which is open to all participants on the call.

On today’s call, management’s prepared remarks and answers to questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For a more detailed discussion related to these risks and uncertainties, we encourage listeners to review the Company’s most recent filings with the SEC.

As a reminder, forward-looking statements represent management’s view only as of the date of this call. Wheeler Real Estate Investment Trust assumes no obligations to update any forward-looking statements in the future. Definitions and reconciliations of non-GAAP measures are included in the Company’s quarterly supplemental package, which is available through the Company’s Website.

With that, I’d now like to turn the call over to Jon Wheeler, Chief Executive Officer and Chairman of Wheeler Real Estate Investment Trust. Please go ahead, Jon.

Jon Wheeler

Thank you, Laura. Good morning, everyone. And welcome to the 2016 fourth quarter earnings call for Wheeler Real Estate Investment Trust. Today's call will begin with an update on the execution of our strategic initiatives including progress on our disposition strategy, our capital raising efforts and the results from investing those funds. We’ll also review our financials and property operations, speak about the reverse stock split and quarterly dividend announcement we made in our earnings release yesterday afternoon and issue our full year 2017 guidance, a first for the company. 2016 was undoubtedly a transformational year for Wheeler. From an earnings perspective, we’re able to double our earnings run rate over the course of the year, starting at $0.10 to $0.11 of AFFO run rate growing to $0.21 pro forma AFFO run rate in the fourth quarter.

Management was also able to execute on several very specific goals, which included accretive capital raises, the streamlining of our overhead corporate, general and administrative costs and acquisition of 23 grocery-anchored properties at a weighted average cap rate of 8.3% of which 9% required in the fourth quarter that fit our specific acquisition criteria. All these efforts we believe, benefited our shareholders and set the company up for continued success in 2017.

I want to be redundant here for a moment, so please bear with me as I review all that we have to. get here today, this is very important. In the first quarter of 2016, we told you that we had a plan that we felt have executed on, which gives to covering our annual common dividend, up $0.21 with AFFO in the second half of the year. We started off the year acquiring A-C Portfolio in April, exhausting the last remaining capital from our Series C raise to March 2015. That portfolio has performed very well and we’re able to efficiently manage the 14 centers from Charleston regional office and still see upside potential through leasing in a Phase II expansion component that I’ll talk about later in the call.

In order to acquire that portfolio we increased our KeyBank facility to $67 million and took out an $8 million loan with Revere Capital, which bears an interest rate of 8%. There are several key components within the KeyBank line increase that required us to delever with one year and we’re successful in satisfying the line pay down by raising approximately $23 million of net proceeds being an at the market offering on our Series B preferred stock in just over four months.

Subsequently, in September and December we're able to issue 2,237,000 shares, of our 8.75% Series D preferred stock netting $52 million to invest in both our acquisition pipeline and a $12 million loan to Sea Turtle Marketplace development Hilton Head, South Carolina. The issuance of the Series B and Series D preferred stock, as well as, the 36% increase in our stock price from March 31, 2016 to the end of the year, lowered our implied weighted average cost of capital from 8.6% to 7%.

With the proceeds of the Series D capital, we acquired nine grocery-anchored shopping centers in the fourth quarter for an aggregate $115 million at a weighted average cap rate of 8.1%. These acquisitions allowed us to further diversify both geographically and credit tenant wise as we entered our 12th state Pennsylvania and added four new grocers to the tenant roster, which brings our total to 2016 to five new grocers.

Two super regional grocers Publix and Harris Teeter, and three regional grocers Ingles, Lowes, Lowes Food and Farm Fresh to help produce our exposure to anyone tenant and will allow us to further strengthen our brand in the secondary and tertiary markets with these retailers. We also made an investment in an off-balance sheet development, which is progressing nicely. I was just down visiting the Sea Turtle Marketplace on Hilton Head, South Carolina last week and the project is on track to deliver a 2017 with many tenants set to open this summer.

Our investment in this redevelopment has provided significant interest in development fee income and we’ll additional assets, property management and additional fee income as tenants come online in the future. In addition to raising accretive capital and investing smartly, we knew that in order to meet our goals we're going to have to make some very tough decisions with regards to lowering our general and administrative overhead costs. We're able to streamline internal operations and techno of sling [ph] and the combined of job roles with our human capital, while ensuring the properties were still maintained to our professional standards.

With that came some key position changes. Wilkes Graham joined us just over a year ago as our CFO, bringing with him his capital markets knowledge and his connections within the REIT industry. Dave Kelly, previously our Director of Acquisitions is now our Chief Investment Officer handling all acquisitions and dispositions for the Company. Dave has been with us now for three years and has been very successful in sourcing and closing in accretive acquisitions, closing on approximately $403 million since joining the firm. His experience with national grocers SUPERVALU allows us to capitalize on his expertise and the way the retailers approach site selection and the profitabilities in stores. I would like to say Dave speaks grocery and he does it very well.

With 54 income producing properties in the portfolio and elimination of the Chief Operating Officer role, we need to make sure that our property and asset management was secure and have promoted Andy Franklin to Senior Vice President of Operations. Andy previously oversaw the Southeast Portfolio and will now oversee the entire asset in operations management ensuring stability throughout those disciplines. Andy has been affiliated with the company since 2014 and has extensive knowledge in commercial real estate, having worked with large institutions and other well known commercial real estate firms.

We're also internalize investor relations promoting Laura Nguyen to Director of Investor Relations. Laura has been with the firm since 2014, working with management to increase brand awareness for Wheeler with current and potential investors.

Through national attrition and the strategic combined roles, we successfully lowered our cash, corporate, general and administrative and annualized cost from $6.5 million in the first quarter of 2016 to $4.1 million in the fourth quarter and remain a scalable and manageable platform. Our team is strong with senior management in place and aligned and we feel that we continue our cost containment strategy and leverage our portfolio to provide value to our shareholders.

I will now briefly touch on property operations for the portfolio. Wilkes will further discuss the details, but once again we saw positive increases through our property operations in several metrics. We are consistently outperforming the industry average in leasing, same-store NOI and rent spreads and we believe there is still upside potential within the portfolio as we implement our expertise at the 23 new properties we acquired this year.

I’d like to take a moment to point out the strength of our leasing team, as we did experience the closure of one of our anchor tenants. Career Point College, a vocational school that occupied approximately 26,000 feet of the 58,000 total gross leasable area at Perimeter Square located in Tulsa, Oklahoma that shut down its operations in late 2016. Perimeter is shadow anchored by a Wal-Mart and it’s a Wal-Mart billing grocery store. Career Point had occupied the space for 11 years before closing. While this event could have a lasting negative impact on the profitability of the asset and will have a short-term effect on earnings, our leasing team was able to backfill 19,000 square feet of their available space with a new tenant, Aspire Fitness in just 75 days after hearing the news at a higher record square feet and with the lease commencement in April. The remaining 7,000 feet will also provide us the opportunity to see a higher rent per square foot than what was previously being paid by Career Point.

The speed of which we’re able to fill the availability, demonstrates Garnett Square’s excellent location and strong draw. I'm very pleased with the strength of our leasing team and department as demonstrated by the swift actions taken to quickly remedy the situation.

On the other call, I mentioned the Folly Road expansion Harris Teeter anchored center located in Charleston, South Carolina. This on balance sheet Page II expansion will add an additional 7,500 square feet to an already 100% leased and occupied property. We expect to see the additional revenues in this project in late 2017 or early 2018. Similarly, we have pre-leased approximately 60% of the available 22,000 square feet and our Fire House redevelopment project located in Columbia, South Carolina, which is right at the base of the state capital and very close to the school there, the University of South Carolina. Those revenues should also be realized in late 2017 or early 2018.

I’ll now update you on the progress we've made since announcing our disposition strategy and the subsequent listing of eight triple-net leased properties for sale back in the third quarter of 2015. To date we have closed on the sale of four of those properties, are expecting to close on two more literally today. The Ruby Tuesday and Outback Steakhouse parcels at Pierpont Center, which have been under contract for two years and will close today our prime example of the strength of our assets at a momentum in the tripe-net leased market right now.

We bought the center in January of 2015 and assigned an outparcels, an 8.61% cap rate today we're selling them for a 5.82% cap rate to an all cash buyer, a tremendous cap rate compression. Our approach on the disposition strategy was two-fold. One, we’re able to successfully cap rate compression in the secondary and tertiary markets on two assets, we felt that we could increase the cash flow by investing the proceeds into the acquisition of core assets. We are looking to do this across the entire portfolio where applicable and as such are under on the contract on the ground lease with Chipotle at Conyers Crossing for a 4.65% cap rate that we help to close on in the first quarter.

Wilkes will discuss our guidance, but as we look to 2017, our focus is on maximizing value of our current portfolio and associates. Each and every one of our associates is a stockholder, which I'm very proud of therefore aligned with our investors. We see many opportunities this year for value creation through leasing goals, third party leasing and asset management and property management fees, the Folly Road expansion and our Firehouse redevelopment project.

We look to execute on select refinancings to further lower our cost of capital and extend our debt maturities. I'm extremely pleased with all of the progress we've made in 2016 to reach dividend coverage on a run rate basis. But going forward we’ll shift our focus from run rate earnings to actual results.

With that I’ll turn the call over to Wilkes to review our 2016 financials and discuss our outlook and guidance for 2017.

Wilkes Graham

Thank you, Jon and good morning everyone. I’ll begin by touching on some of the financial highlight in 2016. I’ll then summarize our fourth quarter 2016 actual and run rate financials before moving to our guidance for 2017.

2016 was an extremely busy year for us at Wheeler. As Jon mentioned we began the year at $0.10 to $0.11 per share AFFO run rate. Over the course of the year we grew that run rate to $0.21. This doubling of our AFFO run rate in just one year is the result of three specific initiatives on which we executed in 2016. First, we reduced our corporate cash, G&A run rate from approximately $6.5 million in the first quarter in 2016 on an annualized basis at the beginning of the year, the $4.1 million on the fourth quarter.

Secondly, we raised $84.5 million of convertible preferred capital via both our Series B and Series D issuances and we deploy this capital into $186 million of acquisitions, totaling 23 properties at a weighted average cap rate of 8.3%. And a current weighted average cost of debt of approximately 3.6%. These transactions lower our weighted average cost of capital from 8.6% to approximately 7%, well below the level at which we invested in assets on levered basis.

Finally our leasing team did an exceptional job of renewing 286,000 square feet of leases at 4.9% rent escalation and signed 148,000 square feet of new deals at $12 a square foot weighted average rents. Our occupancy ended the year at 94% and we continue to see material leasing opportunities across the portfolio and in particular among the 50% of our portfolio that we’ve acquired over the past six quarters. Finally, same-store NOI year-over-year growth in 2016 was 3.7% above the retail REIT industry average.

Turning to the fourth quarter 2016 results. We reported $0.02 per share of AFFO or $0.08 per share on an annualized basis, but of course the fourth quarter was an extremely busy quarter for us and one where we completed what was ultimately a two-year journey to reaching dividend coverage of our $0.21 dividend with AFFO on a run rate basis.

During the quarter, we issued 637,000 shares of 8.75% Series D, $25 par value convertible preferred shares on December 6 at $24 a share for net proceeds of $14.4 million. These funds provided us the remaining capital needed to close on $115 million of assets at an 8.1% weighted average cap rate. So the quarter only included 23% of these assets full quarter contribution of NOI.

Truing-up this acquisition NOI to the fourth quarter alone as $0.02 cents of share for the quarter or $0.10 per share on an annualized basis to our reported fourth quarter results. As detailed in our earnings release last night, after accounting for other adjustments, such as the loss of NOI from Career Point and the subsequent backfilling with Aspire Fitness, our full quarters worth of interest expense on the acquired properties, development fees of Sea Turtle Marketplace, seasonal G&A costs that are not annualized and non-recurring expenses, such a severance and third party contracts that we did not renew in the fourth quarter and that do not carry over into 2017.

We achieved our guidance of $0.21 per share annualized AFFO run rate for the fourth quarter of 2016. Notably, same-store NOI increased 3.7% on a GAAP basis year-over-year and 2.8% on a cash basis for the year. These results are inclusive of a year-end reduction in our total tenant reimbursement accruals that was the result of our annual true-up of monthly and annually build reimbursements, which are based on budgeted property expenses and actually reimbursements received, which are based on actual expenses incurred at the properties. This adjustment resulted in a decline in our same-store NOI in the fourth quarter, a 4.1% on a GAAP basis and 5.2% on a cash basis year-over-year. Therefore, we point to our annual same-store results is a better indicator of same-store portfolio performance. We’ve addressed the variability in our tenant reimbursement billing and budgeting processes and do not expect material variances in our year-end true-ups going forward.

I’ll cover our 2016 highlights, so let me discuss where our balance sheet stands today and how we plan to manage going forward in 2017. We ended 2016 with $315 million in debt comprising $228.6 million of property specific mortgages, bearing a weighted average interest rate of 4.5%. $74 million on our key line at one month LIBOR plus 250. $7.45 million on our Revere facility at 8%, plus 6 million warrants in the case of default. $3 million on our South line at 4.25% and $1.4 million of senior notes.

The governing covenant of our $75 million line of credit with KeyBank of which $74 million was drawn in December 31, 2016 his key is leveraged metric of debt to gross asset value. Using this metric, our leverage stood at 62.5% at December 31, 2016, under the 65% maximum leverage allowed by the covenant. Our global leverage or debt plus preferreds as a percent of enterprise value stands at 76%. We certainly recognized that over time our leverage needs to come down.

Looking at our near term debt maturities, we have $16 million maturing in 2017 and $81 million maturing in 2018. We’ll quickly look at these maturities in more detail.

In 2017, our $7.45 million with Revere matures on April 12, 2017. We have the option to pay down this balance by $450,000 in order to extend this maturity another year. The remaining maturities are a $3 million line of credit with VantageSouth and the mortgages on our Walnut Hill, Monarch Bank and Columbia Firehouse assets. But we cannot currently comment specifically, we can say that we are in negotiations with several lenders to refinance the majority of these maturities and we look to be able to share more on this front in the coming weeks.

The weighted average interest rate on our 2017 maturities is 6.4%, so we certainly see an opportunity for interest expense savings. The majority of our $81 million of debt maturing in 2018 is our $74 million balance with KeyBank. We have a great relationship with KeyBank and we thank them for their continued support with us. We are in advanced conversations with lenders to syndicate the line and we are optimistic that our relationship with KeyBank will extend well beyond the May 2018 scheduled maturity of the line.

We also entered 2016 with $103 million of combined Series A, B and D preferreds. The Series B shares can be converted into common stock at $5 per share and the Series D shares can be converted into common stock at $2.12 per share.

Finally, turning to cash. We ended 2016 with cash and cash equivalents of $4.9 million compared to the minimum $2.5 million required cash balance as determined by KeyBank through April 12, 2017. This minimum balance must be over $5 million subsequent to April 12 2017 and based on the guidance that I’ll discuss here in a minute, we anticipate remaining above this $5 million level for the balance of 2017. We note that our cash balance assumptions, assume the successful closing of our sale of our Ruby Tuesday and Outback Parcels at Pierpont, which as Jon mentioned will close today, which have been under contract to be sold since the third quarter 2015. The sale of the Chipotle at Conyers Crossing asset. These sales were also factored into our 2017 earnings guidance.

Now as Jon mentioned as we look to 2017, our focus is on actual results. As such we are prepared issue full year guidance for 2017 on both our core FFO basis, as well as, AFFO.

Before I turn to this guidance, I want to mention two announcements we made last night in our earnings release. First, following our payment of our March 2017 monthly dividend in April, we're moving to quarterly dividend payments that allow for more flexibility in cash flow management and bring us in line with the majority of our public REIT competition. As such, our inaugural quarterly dividend payment will be for the April to June 2017 period and will be paid in July 2017.

Secondly, earlier this month our board of directors approved one-for-eight reverse stock split. Our board determined that this reverse split allows for more fine-tuned earning guidance, less volatility in quarterly earnings, percentage beats and misses and removes the currently expensive transactional per share cost of buying or selling our stock. As part of the exploratory process, we reached out to other public company management teams that have executed reverse splits in the past and the consistent conclusion from them was that they should have acted sooner.

We expect the reverse split to take effect at the end of first quarter or at 5:00 PM after the close of trading on March 31, 2017. Beginning with our 2017 guidance, we will now start discussing our results on a split adjusted basis. Going forward our $0.21 dividend will be $1.68 per share or$0.42 per share per quarter. Further, we expect our total shares and operating units outstanding throughout 2017 to be approximately [indiscernible].

Looking at the guidance, we are introducing full year core FFO per share guidance of $1.95 to $2 per share and AFFO per share guidance of $1.68 to $1.73. This guidance includes a number of assumptions and I’ll summarize them now in eight steps. First, we assume a 92% to 93% NOI margin on $44 million of in-place annual rents, which excludes the lost income from the Career Point vacancy.

Second, we assume 90% renewals on approximately 350,000 square feet of lease explorations at 3% to 5% ramp ups and 120,000 to 150,000 square feet of new leasing compared to 148,000 square feet of new leases we saw in 2016.

As I mentioned before there remains a substantial opportunity for lease up in the 50% of the portfolio that we've acquired over the past six quarters and our leasing team is prepared to deliver. To be sure that the first eight weeks of this year we've already signed 49,000 square feet of new releases and we continue to see strong momentum on this front. Third, we project approximately $2 million in total assets and property management fees, leasing commissions and development fees, which run through our taxable REIT subsidiary or our TRS. In the past, we have not incurred taxes on these fees as we were able to burn through tax net loss carry-forwards. However, in 2016 we exhausted these NOLs and occurred $107,000 of taxes in the fourth quarter.

Going forward, we anticipate a 15% pretax profit margin on our third party fee business and our budgeting for 3%5 to 40% in taxes on these profits. This results in just over $200,000 of contribution to AFFO from third party fees or about half of the $400,000 in AFFO from this business segment in 2016. While we continue to take advantage of our ability to generate third party fees via the management leasing and development of non-REIT owned assets. We’ve remained focused on maximizing the contribution to our AFFO from REIT owned assets and 2017 should represent another step forward on this front.

Fourth, let’s discuss G&A. We feel it’s important to look at G&A globally moving forward and by that I mean including the G&A allocated to both our REIT and non-REIT owned businesses. As I mentioned previously, last year we focused on reducing our REIT G&A run rate to $4 million and we delivered on this objective. However, another $1.6 million of our G&A was allocated to non-REIT management leasing our services. As such, our global cash G&A run rate ended the year at around $5.5 million.

Looking to 2017, we expect combined REIT and non-REIT G&A to total $4.8 million, assuming no new hires. The distribution of this $4.8 million between the two businesses will be a function of third party fees earned each quarter. Based on our guidance, we estimate approximately $1.8 million and $3 million of our G&A will be allocated to non-REIT and REIT businesses, respectively.

Fifth our guidance also assumes $960,000 of cash interest income from our 8% cash, 4% accrued, $12 million loan to the Sea Turtle Marketplace redevelopment on Hilton Head Island.

Sixth, we project approximately $13.8 million of interest expense for the year, which assumes constant debt balances other than scheduled amortized principle payments and flat interest rates. On our current $315 million of total debt, this translates to an approximate weighted average interest rate of 4.3% to 4.4%.

Seventh, our preferred dividend obligations in 2017, should total $9.15 million on our Series A, B and D issuances.

Eight and lastly, we continue to include a $0.20 per square foot CapEx reserve across our 4.9 million square foot portfolio, which is just under $1 million in CapEx and TI's funded with cash. This reserve is consistent with the level at which we fund capital expenditures into an improvements across our portfolio with cash. Although we continue to work to improve our disclosures and expect starting in the first quarter of 2017 financials, which should be in early May that we will be able to start disclosing actual revenue enhancing and non-revenue enhancing CapEx and TI expenditures, so that investors and analysts can make their own determination as to our CapEx slowed.

In conclusion, as a result of these eight guiding assumptions, our 2017 guidance is for $1.95 to $2 per share of core FFO, which includes accrued interest income, straight line rental income and above below market lease amortization and excludes CapEx and TIs. And our AFFO guidance of $1.68 to $1.73.

Now before I move to first quarter 2017 guidance, I'd like to make a comment on the effect on our guidance from the Career Point vacancy and the backfilling with Aspire Fitness. We calculated that Career Point’s vacancy resulted in a loss of $0.05 per split adjusted share and cash flows and the Aspire backfill adds $0.02 per split adjusted share to our 2017 results.

On a full year basis, if we assume that Aspire were to begin paying rents and reimbursements on January 1, 2017, the Aspire lease would have added $0.4 per share or $0.02 per share more than it actually will. Finally, we see promising prospects for the lease up of the last 7,000 square feet of the former Career Point space and assuming market rents we expect this space to generate another $0.02 per share of cash flow.

In total, we anticipate replacing the $0.05 per share of lost Career Point income with $0.06 per share of Aspire and as of yet on lease remaining space that Career Point occupied. Again, of this $0.06 per share of ultimate income only $0.02 per share will be recognized in 2017, banks on the timing of Aspire’s rent commencement.

Now let's turn to first quarter 2017 guidance. As we’ve mentioned several times on this call so far. Our focus in 2017 is on actual results, not run rates or performance. As such, it’s important to take into account the seasonality of our G&A, the majority of which hits in the first quarter every year. Specifically, we expect to book $250,000 to $300000 of auditing and SOX charges in the first quarter. We are additionally budgeting for $100,000 to $150,000 in snow removal costs in the first quarter alone.

To be sure, February proved to be a warm month and we’re optimistic that we’ll see some savings and snow removal, but we will remain conservative in our approach. As such this $400,000 or so of total seasonal costs in the first quarter represent $0.04 to $0.05 per share in earnings. In total for 2017, we anticipate $0.05 to $0.06 per share of total seasonal cost. So without question the majority of these costs fall in the first quarter. After factoring in these costs, our guidance for the first quarter of 2017 for core FFO is $0.43 to $0.45 per share and for AFFO is $0.36 to $0.38 per share.

As a point of reference if we were to spread all 2017 seasonal costs equally across the four quarters, our first quarter 2017 guidance for AFFO would have been $0.39 to $0.41. We will continue to provide next quarter guidance as we move throughout 2017 and we’ll either reconfirm or update our 2017 full year guidance as we move along.

In conclusion, we are looking forward to executing 2017 on many initiatives that based on our guidance, should not only lead to full year actual coverage of the dividend for the first time, but should allow us to exit the year with a nice cushion above the dividend. We intend to remain very focused on lowering our cost of capital, managing leverage and maximizing the value of our portfolio and the talent of our associates.

I’ll now turn the call back to Jon for his closing remarks.

Jon Wheeler

Thank you, Wilkes, every year since going public in 2012 on reporting fourth quarter results. I always say that year was transformational as we have always been a growing company. 2016 was truly a transformational year and looking forward 2017 is all about results. We believe our portfolio of grocery-anchored shopping centers is not only well insulated from the many competitive forces that currently exist in higher density markets. But it's also materially undervalued based on our current stock price.

Our associates, management team and board are significant owners of our stock and our focused going forward continues to be maximizing value for our shareholders.

With that, I would like to thank you all for your time. Operator, I'd like to turn it over to you for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question.

Mitch Germain

Career Point, I'm just curious anyone else obviously, that they've moved on anyone else on your watch list and maybe how much of the revenues that is as a percentage?

Jon Wheeler

Mitch, good morning. This is Jon. So, the answer being no, on the current watch list and that one was a little bit different just because of the business they were in and how to handle their business. But I am very proud on them, that situation as we stated in our call here we literally rectified it in 75 days. It was really very strong.

Mitch Germain

Great. And then the sale proceeds, you said that there were two closing today, another two expected in terms of timing and dollar value. What should we expect?

Laura Nguyen

Hey, Mitch, it’s Laura. How are you?

Mitch Germain

How are you?

Laura Nguyen

Good. We are closing on Ruby Tuesday and Outback today at Pierpont and we are expecting proceeds to be about – took $2 million purchase price from the buyer and we’re still waiting to close here so I’ll have the final settlement later on that we can get back to you. And then Chipotle, we are having under contract for a little over $1.5 million.

Wilkes Graham

So, Mitch, I would say between the three sales it should be I’d say between $1.5 million and $2 million of total net proceeds.

Mitch Germain

Okay. And then with regards to the perimeter asset, now that you've had some 10 issues, you’re going to be looking to release it. Is that going to stay, is that something you guys may have it on a list to possibly sell over time or do you think fixing it up and releasing that space, it's going to be a core asset for you to hold?

Jon Wheeler

Again, good question I think there's two sides of the coin and one, we always look for obviously the stability and long-term hold, I think that also could be a candidate to sell. We're doing right now in the process of refinancing that asset with the new tenant Aspire, because the rents what they will be paying versus what Career was paying and the last time we added appraise, the appraisal was even less on the value of the rent per square foot to what Career was paying. So, I think here based upon the refinancing, it will not most likely be CMBS, it will be on book. It will give us the opportunity to make that decision once they’ve actually open for business. So as we stated in our call, the lease commences in April, operating expenses will commence around, June and then the full base rent plus operating expenses sometime around August, September. So I think once all that takes place. And again post-refinancing, I think that will be a good opportunity in that time to look, okay, do we turn left or right on keep in the center.

Mitch Germain

Great. That’s it from me guys. Thanks so much.

Jon Wheeler

Thanks, Mitch.

Operator

Our next question comes from the line of Steve Shaw with Compass Point. Please proceed with your question.

Steve Shaw

Hey guys. Just getting back to the outparcel sales, was there one left out of those net proceeds?

Laura Nguyen

No. We've only sold – we have the Starbuck rise in last year, the three grocery stores then we sold, obviously, today Ruby Tuesday and Outback. And then Chipotle was not a part of the original eight. Two of those that were part of it originally, we actually took off the market due to loan maturities.

Steve Shaw

Okay.

Laura Nguyen

So, Chipotle is actually an additional, that would be the – if you technically, we had all eight, Chipotle would have been a ninth.

Steve Shaw

Got you. Getting back to leasing and occupancy, I know you guys are, I've talked about the 7,000 net perimeter and that is a promising space. Any other specific assets or footprint of assets that that could be promising in terms of filling quickly or rent spreads?

Wilkes Graham

Steve, I would say, if you go back and look at the portfolio that we owned on June 30, 2015, which was right about half of what we own today. It was 95.6% occupied. Our leasing team sees opportunity among that square footage to increase it incrementally. But certainly, I think $250 million or so real estate that we bought since then is about 92% percent occupied. The AC portfolio is 9% occupied, the $80 million or so that we bought in the third quarter of 2015 is about 92% occupied. And so we know that's where we see the opportunities in the newly acquired spaces where our leasing team is really, just getting their hand on these assets for the first time last year.

Jon Wheeler

And Steve, let me add - this is Jon, let me add to that as well. So when you look at something like the AC portfolio and 14 shopping centers and 92% leased and occupied. One thing we’re very proud of is that, when we leased and occupied, a very tight margin. I always like to say, leased and occupied. There’s a lot of people talk about being leased, but it’s not occupied. Obviously, we’re into co-tenancy and cross shopping. From the standpoint, let’s not forget; A, moving those percentages from 92% to 93% to 94 and what I call maintenance leasing, because your anchors and your junior anchors is already in place. We're buying that vacancy for free and you can turn a $12 into $13, $14 per square foot triple-net and have a lot of bang, if you will, for your leasing efforts.

Another good example is if you look at Harris Teeter, down in Charleston on Folly Road, we’ll be adding another 7,000 feet plus square footage. The center’s already paid for, the land’s already paid for, the land’s already paid for and the accretive benefit is very significant, especially since the building, it'll be right there on the main road, Folly Road and the rest will be higher than what the inline rents are there adjacent to the Harris Teeter.

And thirdly, I keep on focusing, you’ve heard me say this time and time again, especially in ancillary income, well, Folly Road is a good example. Chipotle is a good example down in ----. As we look at our portfolio, going forward we'd like to have probably one agent, leasing agent folk’s just on special and ancillary income as we great value that we created. And again, as you heard me say in the past, on a non-freestanding shopping center and today we're buying an average of about 100,000 square foot per center, you can take out significant value that is unscheduled on a pro forma in that parking field and that’s in addition to the seasonal items that can go out there, but actually creating and delineating outparcels and that's a real big focus for us going forward.

Steve Shaw

Thanks.

Jon Wheeler

Thanks, Steve.

Operator

Our next question comes from the line of Craig Kuccera with Wunderlich. Please proceed with your question.

Craig Kuccera

Hey, good morning guys. Appreciate the commentary on the quarterly same-store NOI on the reimbursement side. Can you provide a little bit more color on how we should think about this next year? Is there going to be any seasonality or based on your commentary, should we just assume sort of, what things were annually as far as, the quarterly numbers?

Wilkes Graham

Thanks, Craig. Yeah I would focus on the annual. As I mentioned in the script, we don’t expect there would as much sort of quarter-to-quarter volatility and the reimbursement accruals as it was this year. I’ll give you a couple of numbers here to help you though. If you look at the first nine months, same-store NOI or let me just say the components of same-store NOI being rental income, reimbursements and operating expenses. If you look through the first nine months of last year, year-over-year through September 30th, rental income was up 3%. Operating expenses were flat and reimbursements were up about 10%. And then for the full year, rental income was up 2.3%, operating expenses were down 5.3% and reimbursements were down 3.8%.

Reimbursement should track operating expenses, so through the first nine months, reimbursements were again up 10% for flat operating expenses year-over-year, they were running a little high. That's the function of real estate taxes came in materially lower than we expected in the fourth quarter. There were some grounds on landscaping, budgeted costs that frankly, we had some savings on. But we have been accruing based on those expenses all year and so there was an adjustment that needed to be made in the fourth quarter.

So, again, I would say going forward that, I think the process that we've improved on is that we’ll be making adjustments to those accruals, as we go throughout the year, so that you’re not going to have a big catch up, one way or the other in the fourth quarter. And to that end on this note in the fourth quarter 2015 the same process resulted in a material pick up in reimbursements where expenses were higher than we expected. So, we saw the reverse this year, which probably is again, probably the reason why you saw the negative same-store NOI growth in the fourth quarter because it was, I guess, a difficult comp.

Jon Wheeler

And Steve, I’ll add to that as well, - I’m sorry Craig, my apologies. This is Jon, I’ll add to that as well. Each year and each year thereafter that we owned an asset, these numbers become tighter and tighter. If you’ve heard us talk about the growth in the significant acquisitions and [indiscernible] portfolio and you look at the AC portfolio, 14 assets and 13 in South Carolina, one in Georgia. Literally each year that you own these assets is common that you get tighter and better and better, knowing what can be reimbursed, what can be spent or invested and then the reconciliations get tighter each year. So, I think you'll see a lot better, smoother process as it relates 2017/2018 based on all of our active acquisitions.

Craig Kuccera

Got it. I want to circle back on the leasing side. I appreciate your commentary and your guidance that you think you’ll have a pretty, 90 percentage, I think renewal rates and you anticipate. It looks like it’s a little lighter this year, it sounds like your leasing team will be focused maybe more on leasing up new space as opposed to 2018. Or do you think it’s impossible to start working on some of the 2018 at this point?

Wilkes Graham

That's a good question. If you look at last year, we had 188,000 square feet of explorations and we ended up signing 288,000 square feet of renewals. So we’re looking at our guidance, we’ve got 350,000 square feet reeling this year. Our leasing team out of leasing retreat earlier this month, they feel very confident in their ability to renew that 350,000 square feet. But I certainly, I mean, speaking with them, we know they’re going to be working on 2018 as well. Then again, we did 148,000 square feet of new leasing last year and we’re budgeting 120,000 to 150,000 square feet this year. It’s also a number they feel confident with. So our guidance is based on expirations this year, but again if the team can deliver like they did last year. I think they'll be able certainly, they’ll targeting 2018 expirations as well.

Jon Wheeler

And Craig, this is Jon again. So, as we do portfolio reviews with the anchored tenants with the Bi-Lo and Dixie and into [indiscernible] and now we’ve got obviously, Publix and Harris Teeter and some other retailers that we heard about them in the call. One thing is nice that we're – that's actually new for a lot of these retailers is they’re doing some significant capital improvements. As such they need longer lease terms. So we're seeing a lot anchors come to us saying, hey, we want to renovate the store, Publix is coming to town, for example, Kroger is already there in some centers and Publix is coming to town.

We want to counter their entry, we want to either expand and/or renovate our store, but in doing that, we didn’t go ahead and exercise maybe one or two of our current pending five year renewal options. And we’re seeing quite a bit of that right now, not only with the anchors and grocery store, but the general anchors as well. If you look at the success on the lease renewals in 2016, I have the paperwork right in front of me, but I think two of those, the extra square footage was associated with anchors for renewing early what I just said.

Craig Kuccera

Got it. I think in your opening commentary, you mentioned that the Folly Road and the Columbian Firehouse were possibly going to impact earnings later this year. Did I hear that correctly? And if so, kind of what are the expectations to the impact of earnings in the back half of the year?

Wilkes Graham

I think I’d be more conservative on that Craig. I would say probably left that spillover or drag it to 2018, just knowing the redevelopment and the development process and the entitlements. But I think it’s important to know for the listeners that we don't like to start anything until its 50% preleased. And that would be the case for these two developments. I'm happy to say that the one in Columbia is right there at the midst of it. Across the street from Five Guys and Ruth's Chris Steak House and that's actually set this percent preleased and we have all our approvals there. So that will start here pretty soon and I’m happy to say, as I mentioned earlier, its right at the base of the state capital and based on the common grounds of the university.

Jon Wheeler

Craig, I’ll just add, I think it's possible that one or both of those may start generating income for us in the fourth quarter this year. But our guidance is not assuming that, we’re assuming it happens in 2018.

Craig Kuccera

Got it. You’ve closed on a number of assets in the fourth quarter and throughout the year had a big acquisition year. But I'd be curious as you survey the land today. Have you seen any movement in cap rates, since the election in the movements in here.

David Kelly

Yeah, Craig, this is Dave Kelly. We have seen some softening in cap rates. What we’re finding now is we’re getting better quality assets at a little bit lower cap rise. But they’re requiring less long-term investment. So, yeah, so we are seeing a little bit of movement there. We did have a busy obviously, fourth quarter of 2016. So right now we're looking at those just like other properties into our portfolio. But we are continuing to see a very strong pipeline of assets out there that been 8 to 9 cap rates, grocery-anchored, secondary, tertiary in that with all the investments.

Craig Kuccera

Okay. Thanks guys.

Jon Wheeler

Thanks, Craig.

Operator

[Operator Instructions] Our next question comes from the line of Kent Engelke with Capitol Securities. Please proceed with your question.

Kent Engelke

Hey, Jon, hey, Wilkes, how are you doing. First off, I just want to say thanks for being so transparent about AFFO and core FFO and the likes, appreciate that. Secondly, my question is about leasing and occupancy has already been answered, I want to say, I want to say, hey, thanks for your transparency. Thank you.

Jon Wheeler

Thank you.

Operator

Our next question comes from one of Mitch Germain with JMP Securities. Please proceed with your question.

Mitch Germain

Hey, guys, just one more. Wilkes, what takes you to the bottom end of guidance versus takes you to the top end of guidance?

Wilkes Graham

Its’ the high and end of the leasing projections; 120,000 square feet, aren't 150,000 square feet. There are some assumptions on the interest rates on refinancing that we’re working on that again, we said we have to be able to discuss here in short order. I guess, we didn’t disclose it, but there’s just some, same-store NOI assumptions and things like that. So just portfolio performance. But it is a pretty tight range as you can see. I mean pre-split adjusted is basically $0.21 to $0.22. Again it would be about any higher, if we’re talking in today’s pre-split numbers, it’d be about any higher, if we had Career Point. And it’d be about any higher, if you gave us full credit for Aspire. But as Jon said, those rents are coming in later in the year. So, it’s pretty tight range. Its mainly on new leasing volumes, interest expense on refinancings and then just general portfolio of those.

Mitch Germain

The mix of G&A does that impact it at all as well?

Wilkes Graham

Again, we’re guiding the $4.8 million of total G&A whether it gets allocated to the REIT or the non-REIT business services, it all flows through the income statement like it last year. So the mix doesn't matter.

Mitch Germain

Okay. Got you. And then is Aspire cash paying begin in April?

Jon Wheeler

This is Jon, let me address that, so they start, it’s lease commencement date in April, so when we sign the leases from a legal perspective, we like those leases to simultaneously commence. So they are valid lease and then the difference between April and June is the construction time, which then they'll start paying their operating expenses, which I believe are somewhere between $4 and $4.50 for your tax, insurance and CAM [ph]. Then there in August, September after their free rent period, they start paying full base, but not for expenses.

Mitch Germain

Got you.

Operator

Our next question comes from the line of Lawrence Raiman with LDR Capital Management. Please proceed with your question.

Lawrence Raiman

Hi, gang. Congratulations on all the heavy lifting that you accomplished last year, both internally with some decisions you made, as well as, externally on the capital side and the acquisition side, just want to give you kudos for that. Let's look forward now, you all have been very acquisitive in the last few years. In your guidance for 2017, there's no conversation in Jon in your outlook comments, there was no comments regarding your desire to acquire properties. I understand that the balance sheet is really tight right now. So what is your thought with regard to your capital plan? With regard to balance sheet usage, as well as, acquisitions in this coming year?

Jon Wheeler

Thanks, Larry, appreciate the comments and to address your question. Last year was about maximizing shareholder value through to capital raise and the acquisitions that we did. We’ve exhausted that capital; we have a stabilized portfolio with upside potential to releasing and operations. Our focus this year is on maximizing shareholders value throughout the operations of our portfolio. Hopefully, we're lowering our cost of capital via that same method. As Dave said, we continue to see attractive, product out there, but are focus this year is on the current portfolio and the current associates that we have.

Lawrence Raiman

Got it. Thank you very much.

Jon Wheeler

Thank you.

Wilkes Graham

Thanks, Larry.

Operator

Ladies and gentlemen due to time constraints our final question will come from the line of John DeMaio with Newbridge Securities. Please proceed with your question.

John DeMaio

Hey, guys, how are you?

Jon Wheeler

Good morning, John.

John DeMaio

Good morning, Jon. Going from the dividends from 12 payments to 4 payments a year, there's a cost savings on that. Can you elaborate on that?

Jon Wheeler

Yeah, I’ll give you my $0.02 and let Wilkes weight in as well. I think it's from a cost savings standpoint, A; as we adjust our one-for-eight from the standpoint of actual trades. But also if you look at the yield and the dividend, it's the same numerator, denominator. So really from our standpoint, there's no cost savings standpoint. And also as our investor shift from more retail to more institutional that tends to be common place. And I remember we went public back in November 2012, we were a retail REIT, if you will, and 80% of our investments were retail and vice versa with the institutions. So, because of the shift, it’s just more common place on a courtly basis and kind of what is expected. But I wouldn't really say and Wilkes you weight in and is there really any cost savings spaces to us for Montney versus Portland.

Wilkes Graham

Yeah, I think, the actual issuance of those dividends, the cost is minimal, but I would say that carrying a cash balance, every quarter, gives us the ability to earn interest income, again this gives, as I said a little more flexibility on cash flow management. As John said it is obviously more customary for REITs to pay quarterly. So we felt like it was the right thing to do.

John DeMaio

I mean, how many REIT were there monthly, five, six, seven, eight?

Jon Wheeler

A handful.

John DeMaio

You said, you got feedback from other REIT that pay quarterly, what about feedback from institutions?

Wilkes Graham

Actually we said we got feedback from other public companies that have done reverse splits, that’s what we said in the script. Certainly yeah, institutions, have give us feedback in the past that, quarterly common dividends is something there we’re more used to.

John DeMaio

Was there feedback on the reverse split from institutions?

Wilkes Graham

We didn’t feel that was an internal decision that we discuss with our border and so what’s something that we were reaching out to institutional investors every day.

John DeMaio

Okay, thank you guys.

Wilkes Graham

Thank you.

Operator

Thank you, Mr. Wheeler, I would now like to turn the floor back over to you for closing comments.

Jon Wheeler

Yes, ma'am, on behalf of the team here at Wheeler, I would like thank all of those that dialed in for the call and we look forward to talking to you again in May, when we report first quarter 2017 results. Ladies and gentlemen have a great day.

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